Economic Perspective: Higher Housing Costs in Cities

“Today’s program looks at higher housing costs in cities. Mike, there are complaints in many cities, including in North Carolina, of dramatically rising housing prices; both for owning and for renting. What’s the cause, and what, if anything, can be done about it?”

MIKE WALDEN:

“Well I think the root cause is that in this modern era, the technological age, cities have become even more popular places to live. One reason sort of being that’s where the universities are. That’s often where the new tech sector jobs, for example. That’s where the young people come. They get educated. They stay there. They like the amenities that cities have.

“Young people today don’t necessarily want to buy a house on a third of an acre. They’d just as soon live in high rises, and so we’re seeing more people moving to cities. You have what economists call a ‘big increase in demand’, and we’re not seeing a commensurate increase in supply of new housing.”

“There is building that goes on, but obviously if prices are going up the supply isn’t going up as fast as the demand. So what do you do?”

“Well, some cities have said, ‘Let’s limit the number of people coming into our city.’ Some have actually talked about that. Some areas have talked about that. That’s very, very hard to do. Others have said, ‘Well let’s limit the number of new building that goes on.’ That will actually make the problem worse because it’s really a supply problem.”

“A third approach some say is price controls, rent controls. Studies have shown that that actually reduces supply and make quality deteriorate. So many economists say that ultimately if you want to address this problem from the supply side, you have to increase the supply of housing; which is not easy because new housing impacts the environment, it impacts the quality of life and it impacts the aesthetics of the city.”

“So this is an issue I don’t think that’s going to go away. As long as cities are popular we’re going to see this issue of rising prices and rising rents in cities continue.”